While it’s hard enough paying back student loans, many borrowers are stuck with debt from schools that defrauded them.
However, the Department of Education says borrowers should not have to pay back student loans if their school defrauded them. And now we are seeing the federal agency’s proposed changes to the borrower defense to repayment rule.
Ultimately, these changes should make it easier for students to have federal direct student loans discharged if they are owed to a school that engaged in fraudulent activity.
Defense to repayment rule as it stands today
The current borrower defense to repayment rule says that borrowers may only have their debts discharged if it can be proven that the school violated the laws of the state.
For instance, perhaps a school used illegal or deceptive tactics in violation of state law to persuade students to borrow money for higher education. These students can apply to have their federal loans discharged.
However, according to The Washington Post, the borrower defense to repayment rule was rarely used until the 2014 collapse of the Corinthian Colleges for-profit chain. This set off an avalanche of claims sent to the U.S. Department of Education.
The federal agency was forced to take steps to fix the system and create a new standard for students to seek debt relief from federal student loans. This is the reform we are now seeing proposed.
“Students who are defrauded deserve an efficient, transparent and fair process to get the loan relief to which they are legally entitled,” says Secretary of Education John B. King Jr in The Washington Post. “And schools that harm their students should be on the hook for the damage.”
How proposed changes would make things easier
In June 2016, the Department of Education published the Unofficial Notice of Proposed Rulemaking to Amend Direct Loan Program Regulations on Borrower Defense.
The proposed rules are open for public comment until August 1, 2016. It will then be published on November 1, 2016, and is expected to go into effect by July 1, 2017.
However, these changes will not apply to federal student loans retroactively.
That means revisions will only be applicable to federal student loans taken out on or after July 1, 2017. Federal student loans that were taken out before July 1, 2017, will be subject to the rule as it stands today.
New qualifying circumstances for defense to repayment
If the proposed rules are instituted as is, borrowers may claim the borrower defense to repayment rule under three new circumstances.
1. If a court of law finds the school guilty of violating state or federal law.
This takes the burden of proof off of the student, as a court has already determined the school to be in violation.
For instance, in October 2015, Corinthian Colleges was found liable for a host of violations. This resulted in a $530 million judgment.
2. If the school commits a breach of contract.
As stated in the Notice of Proposed Rulemaking, “a breach of contract borrower defense may be raised where a school has failed to deliver specific obligations, such as programs and services, it has committed to by contract.”
Contracts may include enrollment agreements, as well as catalogs, bulletins, circulars, student handbooks, and school regulations.
3. If the school misrepresents something that the student used as the basis for their decision to attend.
The Notice of Proposed Rulemaking states that the borrower defense may be applicable to “misrepresentations about its facilities, financial charges, programs, or employability of its graduates.”
Withholding of information such as this could also be considered misrepresentation.
No more red tape
Currently, schools are able to delay and prevent the student complaint process.
However, the new regulations attached to the defense to repayment would do the following:
- Prevent schools from requiring that students first engage in a school’s internal complaint process before contacting accrediting and government agencies about the complaint
- Prohibit the use of predispute mandatory arbitration agreements by schools
- Prohibit the use of class action lawsuit waivers
- Require schools to disclose to and notify the [Education] Secretary of arbitration filings
How you would make a claim
Under the proposed changes, all qualifying claims would be submitted to and handled by the Student Aid Enforcement Unit at the Federal Student Aid office.
There would be no statute of limitations on making a claim for discharge. However, a qualifying claim must be made while the borrower still has an outstanding student loan balance.
If a borrower wants to be reimbursed for student loan payments already made, they must submit the claim within 6 years of the violation. The only exception to this rule is if the claim being made is based on a court finding.
What do you think?
The Department of Education wants to know what you think of their proposed changes to the borrower defense to repayment rule.
If you would like to share your thoughts, the proposed rules are open for public comment until August 1, 2016. Comments received will be considered before the final publication of the rule in November. The new borrower defense to repayment rule will go into effect next year.
Hopefully, you will never find yourself in a situation requiring such a claim be made. But it’s good to know reform is on the way for borrowers who need it.
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1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
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3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
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Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
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Citizens Bank Disclosures
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